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Stocks are mightier than the pen

Writers strike not yet having an impact on showbiz companies

As most on Wall Street predicted, media and entertainment stocks were not visibly affected by the start of the writers strike.

The Hollywood Reporter Showbiz 50 stock index fell less than 1% on Monday — Day 1 of the walkout — but more than made up for that with a 1.6% gain Tuesday.

Even CBS Corp., which is widely seen as the most exposed to a prolonged strike, saw its Class B shares fall fractionally Monday, then rise 1.4% on Tuesday to $27.90.

Some have argued that the cost of a strike already has been built into stocks, especially in CBS' case, which is off 15% in the past two months. Such conglomerates as Disney, Time Warner and News Corp., however, haven't experienced any discernible trading pattern during the run-up to the strike.

Historically speaking, that's not unusual.

For example, writers went on strike in March 1988 and returned to work five months later. During that time, News Corp. stock dropped 5%, while Disney rose 3%, and neither stock did much in the weeks leading up to the strike, either. Merrill Lynch analyst Jessica Reif Cohen, though, recently said that overall, media stocks during the 1988 strike underperformed the broader markets.

Wall Street has been known to shrug off strikes in many industries. In 1981, when air traffic controllers went on strike, airlines lost $35 million a day in revenue for the first two weeks, but shares of American Airlines at the time rose more than 7% during that two-week frame as some Street analysts opined that resultant job losses would ultimately be a good thing for the airline industry.

Some analysts have said similar things regarding the WGA strike. Reruns and new reality shows might not garner the same high ratings as top-tier series affected by the WGA walkout, but the costs would be low enough so that profitability could increase.

And some ancillary entertainment stocks could benefit. At least one analyst predicts that video rental stocks, for example, could go higher during the strike.

Citi Investment Research analyst Tony Wible said in a report Monday that the writers strike "may bolster (the) rental market" and thereby help Blockbuster and Netflix near-term as reruns "may boost rental demand."

"The lack of new TV content could help boost DVD rentals, given the good lineup of movie titles coming to DVD" this quarter, Wible said.

He also suggested that a resolution of the labor dispute could create hurdles for download content, further boosting rental players. After all, if the guild succeeds in negotiating a higher revenue share from digital downloads, "studios are likely to pass these (added costs) along in the form of higher prices," he said. "Relative to packaged media, this could create another hurdle for digital download, boding well for Blockbuster and Netflix."

Indeed, Netflix shares closed slightly higher Monday, but Blockbuster shares declined in a sign that investors were driven more by nonstrike factors in the first trading session since the strike's start.

Reif Cohen said that during the 1988 strike, the DataStream Media index underperformed the S&P 500 stock index by 5% in the three months leading up to the labor stoppage and by 3% during the strike. The stocks marginally outperformed the S&P in the three months following the strike.

However, she warned that "the potential for the Screen Actors Guild to initiate its own strike in mid-2008 could make it difficult for the group to outperform in the near-term."

Meanwhile, Banc of America Securities analyst Jonathan Jacoby argued in a report that "impacts of the strike in the near-term should be minimal to the networks — assuming the Teamsters do not cause an immediate cessation of production," and media and entertainment stocks should also be relatively unaffected for now.

"There should be a minimal impact to industry revenues in the near-term as CBS, Disney and News Corp. network revenue mixes are heavily weighted toward sports and primetime," while operating costs should actually "see some benefit in the near term due to less production costs on pilots and future episodes."

A prolonged strike would have the greatest impact on CBS as he estimates about 43% of the firm's revenue for 2008 to be exposed to a strike, Jacoby said, echoing a common view on the Street.

But the overall stock and financial effect will depend on how long a labor settlement takes. "The degree of impact is dependent on the duration of the strike, and it's the conglomerates that will be least impacted," he said.